Commercial real estate market conditions remain generally strong and balanced — with ample overall access to capital, and non-“gateway” markets continuing to improve steadily — yet future expectations remain subdued amid worries about global economic weakness, financial market volatility and plunging oil prices, according to Q1 “Sentiment Survey” data released today by The Real Estate Roundtable.
“As the year begins, our latest quarterly Sentiment Survey confirms the overall strength of U.S. commercial real estate markets,” said Roundtable CEO and President Jeffrey D. DeBoer. “Contributing factors include steadily improving job creation across the economy — which translates into robust demand for space — as well as investors’ view of U.S. real estate as a ‘safe haven’ in turbulent times,” he explained. “Also positive are the general equilibrium between supply and demand, and the overall strength of debt and equity capital availability.”
“At the same time, we see confidence in the future eroding somewhat as market participants worry about global economic trends and potential ripple effects on the U.S. economy,” DeBoer continued, noting that these worries are compounded by some federal policies being implemented or proposed in Washington.
“The industry was delighted by the recent enactment of a ‘FIRPTA’ reform law to help boost foreign investment in U.S. infrastructure and real estate, along with increased certainty regarding depreciation of customized tenant build-outs,” he said. “But there is growing concern about future liquidity due to overlapping Dodd-Frank and Basel III financial regulations, as well as a number of tax reform proposals being offered by lawmakers, the Administration and on the campaign trail.”
This includes proposals by President Obama and Sen. Bernie Sanders (I-VT) to limit “like-kind” (Section 1031) exchanges. A study released last July found that eliminating such exchanges “would disrupt many local property markets and harm both tenants and owners,” causing a cascade of negative macroeconomic effects. It would also reduce the affordability of commercial space for large and small tenants, thus reducing businesses’ ability to invest in equipment or employees.
The Overall Sentiment Index slid again this quarter — from 57 in the 4th quarter of last year to 50 in the current one. Of greater concern is the index’ 20-point decline since late 2014. The Current-Conditions Index posted an even greater — 32 point — decline over the same five quarters. The Future-Conditions Index is now at 45 points, down from 52 in the previous quarter (and down 20 points since the Q4-2014 Survey).
Although a majority of survey participants said asset prices had increased in the past year, almost equal numbers of respondents said they expect generally flat or “somewhat lower” valuations a year from now (45% and 41%, respectively) — at least in part due to rising interest rates. Some noted increased inflows of private capital into both debt and equity markets, as well as concern about monetary policymakers’ ability to manage any renewed economic weakness in the United States.
Data for the Q1 survey was gathered in January by Chicago-based FPL Associates on The Roundtable’s behalf.